As the new corporate tax regime unwinds in the UAE in 2023, there are a series of topics that need attention. One of the important areas is dealing with the related parties, or connected parties, of a business. There might be circumstances when a business sells or transfers its goods to a related party, for instance, group companies. There are transfer pricing rules for transactions between related parties as per Federal Decree-Law No. 47 of 2022. In this blog, we are shedding light on the rules of transfer pricing under UAE corporate tax law.
What is Transfer Pricing?
Transfer pricing is a business practice that involves setting prices for goods or services exchanged between related parties. For instance, if a company buys material from another group company, what will be the price of the raw material? The primary goal of transfer pricing is to set prices that fairly allocate profits among the group companies. Furthermore, the transfer pricing policy must also comply with the tax regulations and other laws of the country.
The basis of transfer pricing is the arm’s length principle. According to this principle, the prices for transactions between the related parties should be similar to what would be charged to unrelated parties. In simple words, transfer prices should be fair and as per the open market. We are discussing the arm’s length principle in more detail in the next section.
Transfer Pricing under UAE Corporate Tax Law
Article 34 of the corporate tax law provides comprehensive information on transfer pricing rules and the arm’s length principle. Let’s discuss it in detail below.
Arm’s Length Principle
1. In determining the taxable income of a taxable person, all transactions between related parties must meet the arm’s length principle and any further conditions that may be specified by the Authority.
2. A transaction or an arrangement meets the arm’s length principle if the result of the transaction with the related party is similar to what would have been the result with the unrelated party under the same circumstances.
Transfer Pricing Methods
1. Various transfer pricing methods can be used (any one or combination) to determine the arm’s length status of a transaction or an arrangement:
- The comparable uncontrolled price method
- The resale price method
- The cost-plus method
- The transactional net margin method
- The transactional profit split method
2. The transfer pricing method should be the most reliable method from the above (clause 3 or clause 4). However, If the taxable individual can prove that an alternative transfer pricing method adheres to the arm’s length principle and none of the mentioned methods are feasible, they are permitted to employ an alternative approach. The transfer pricing method must consider the following factors:
- The terms specified in the contract for the transaction or arrangement.
- The attributes and features of the transaction or arrangement
- The economic conditions under which the transaction or arrangement takes place
- The roles executed, resources used, and risks carried by the related parties involved in the transaction or arrangement
- The business approaches and tactics pursued by the related parties participating in the transaction or arrangement
Role of Authority in Transfer Pricing
1. Using the chosen transfer pricing method (as explained in Clauses 3 or 4 of this article) might give a range of acceptable financial outcomes or measurements that are in line with what’s normal for a deal between related parties. However, this is subject to any specific terms set by the Authority in its decision.
2. If the result of a transaction does not fall within the arm’s length range, the Authority will adjust the taxable income as per the arm’s length range. However, this modification should reflect the truth, fairness, and circumstances of the transaction.
3. When the Authority makes changes to the taxable income as explained in Clause 8 of this Article, they must use information that the taxable person either already has or will have in the future.
4. If the Authority or a taxable person modifies the taxable income for a transaction or arrangement to ensure it aligns with the arm’s length standard, the Authority shall also adjust the taxable income of the corresponding related party in that specific transaction or arrangement accordingly.
5. If there is an adjustment to a transaction by a foreign authority to meet the arm’s length standard, the taxable person may make an application to the Authority to modify their taxable income accordingly.
Conclusion
Transfer pricing is a complex area, and it may have a significant impact on a company’s financial performance and taxes. It demands careful planning, documentation, and compliance with local and international regulations to avoid legal and financial risks.
Understanding and complying with transfer pricing under UAE corporate tax law is crucial for businesses. The law ensures that transactions involving related parties are conducted fairly and in line with the arm’s length principle. This promotes transparency and equity in tax matters. The role of the Authority in assessing and, if necessary, adjusting taxable income emphasizes the importance of adhering to these rules to maintain both legal compliance and fairness in economic dealings.
Creative Zone Tax & Accounting
Transfer pricing is a complex area and therefore needs attention. Transfer pricing is very clear under UAE corporate tax law; however, its application might be difficult. Therefore, we, as tax experts, recommend businesses consult with an expert to sort transactions with related parties. If you are a new business or even an established one, you can contact us for any of your tax matters.
